Tax-Free Shopping on the Internet? Not for much longer!

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11-1-1Are tax-free Internet sales doomed? With Amazon facing a huge $260+ million tax bill in Texas, lawsuits in several states, and a recent ruling by a Federal Court in Washington State (concerning Amazon’s fight with the North Carolina Department of Revenue), it could be the beginning of the end, for tax-free Internet shopping.

In a late October ruling (see the end of this post for a link to the court decision), the court basically said that North Carolina’s Dept of Revenue (DOR) didn’t have the right to ask Amazon for detailed purchase data on sales made to state residence since 2003. The DOR could ask for names, addresses, dates, and amount purchased, but they were limited to general information on what was purchased. Instead of being forced to reveal exact details, Amazon was allowed to keep it general – books and movies, for example, instead of titles.

In its original complaint, Amazon claimed that it had provided the DOR with full details of purchase data, EXCEPT for names and addresses, as part of the state’s attempt to audit Amazon for unpaid sales tax. Amazon claimed that providing the address data as well would be a breach of First Amendment privacy rights. The DOR was ordered to return the original purchase data, and make a separate request for a more generic version of purchase data – this time, with some details left out.

Amazon is calling the ruling a win for Internet retailers. But I think consumers lose out.

Yes, the court said was that it was a violation of First Amendment rights for the DOR to get an overly-detailed database of information. In other words, it’s none of the DOR’s business what you buy from Amazon. But the court was very careful to point out that it wasn’t saying the DOR didn’t have the right to levy a tax on its residents. The court’s decision has effectively shifted the burden of paying tax away from Amazon, and onto end consumers.

So where do things stand now?

Well, Amazon is claiming the fact that it didn’t have to turn the information over as a win for Internet retailers. But is it? After the DOR returns the original data, they can make a secondary request for purchaser names and information. If Amazon turns over that information – and there’s no reason to think it won’t – then the DOR is free to start preparing tax bills to NC residents. The DOR has made no secret of its intentions in that regard.

From an Internet retailer standpoint, it could be viewed as a win, in the sense that Amazon likely won’t be left footing the tax bill. The DOR is going to have a hard time forcing Amazon to pay the sales tax on these purchases. The company has no outlets or physical assets in-state, and so under the existing Supreme Court decision (Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992)), North Carolina has no right to hit up Amazon for taxes. Although North Carolina is one of the states that enacted affiliate nexus legislation, Amazon cut ties with its affiliates in that state as soon as the legislation was enacted.

Consumers, on the other hand, should be prepared to reach for their checkbooks. Amazon will simply be the first in a long line of Internet retailers who will be giving up their records. If this decision stands, and Amazon does turn over the modified purchase information to the DOR, you can expect an avalanche of other states enacting legislation to try and get their share of back taxes owing.

Here’s a timeline and brief history of the dispute:

  1. In 2009, as part of an audit of, the NC Department of Revenue requests information on all sales to North Carolina residents between Aug 1, 2003 and Feb 28, 2010. The audit concerns Amazon’s potential tax liability to NC, and doesn’t concern end customers’ potential tax liability.
  2. Amazon complied with the DOR’s request, and provided them with the details of the order – what was purchased, how much it cost, shipping fees, etc. But Amazon didn’t provide the names and addresses of the individual purchasers, saying that would be a breach of privacy.
  3. In March of 2010, the DOR made a second request to Amazon, this time for personal details of the NC shoppers. They threaten Amazon with court action for failure to comply.
  4. In April of 2010, Amazon responded by filing a complaint of its own in the Washington State District Court. Amazon contended that disclosure of the purchaser names and addresses, when combined with detailed records of exactly which items were purchased, would violate the customers right to privacy.
  5. After Amazon filed its complaint, the DOR responded by saying it didn’t want to know all the details of what had been purchased. They just wanted enough information to assess Amazon’s potential tax liability. Amazon then gave the DOR a modified list of purchase information, still excluding personal details, and changing the product descriptions to be more vague, for example, “books and movies” instead of specific titles.
  6. In June of 2010, the DOR asked again for more detailed information including names and addresses of purchasers, and said they would return the original information. However, at the same time the DOR also said that it couldn’t return the actual physical disks, as there was information they still needed to calculate Amazon’s tax liability. They had removed the data from their computers, but the disks were held in the Secretary of State’s desk drawers. The DOR also said that if Amazon didn’t comply, it would charge tax at the highest rate, and leave Amazon to challenge the assessment on a product-by-product, sale-by-sale basis.
  7. In July of 2010, Amazon filed for Summary Judgment. The Washington Court heard arguments on October 13th, and published its decision on October 25th.

Click this link to go to the original court ruling:

Click this link to read the Quill Decision

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